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Doors wide open for secondary insolvency proceedings

Lithuania: bnt attorneys-at-law represent German insolvency administrator in a landmark cross-border insolvency case.

The case concerned interpretation of the European Insolvency Regulation (IR), in particular whether the criteria of an “establishment” were fulfilled, allowing the Lithuanian courts to open so-called secondary insolvency proceedings against a German debtor, where the competent German court had opened insolvency proceedings.

Courts in one Member State may open secondary insolvency proceedings against a debtor with its centre of main interests (COMI) located in another Member State, even if insolvency proceedings have already been opened in that other Member State. Secondary insolvency proceedings may be opened only if the debtor has an “establishment” in the Member State where opening secondary insolvency proceedings is sought. The creditors of the debtor in that state are entitled to request the opening of proceedings. The effects of secondary insolvency proceedings are restricted to the assets in the territory of the state of secondary insolvency proceedings. Creditors can file their claim in the main proceedings and in secondary proceedings. Secondary proceedings may be interesting for local creditors, as local laws and procedures with which they are familiar will apply. Additionally, they can communicate in their native language.

On 7 August 2015 the Lithuanian Court of Appeal confirmed the opening of secondary insolvency proceedings in the case at hand. The Court held the view that the German company had an “establishment” as defined by the IR, meaning “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.”

The key question to be decided was at what moment in time that establishment must exist. The creditor petitioning for opening secondary insolvency proceedings argued that the decisive moment is the moment of opening the main proceedings (here: 31 March 2014). bnt attorney-at-law lawyers Frank Heemann and Karolina Gasparke opposed this view and argued that the decisive moment is the moment when the creditor filed the petition to open secondary proceedings (here: 17 November 2014), an opinion supported by case law of the German Federal Supreme Court and the Court of Appeal of England and Wales. In its judgment the Lithuanian Court of Appeal followed the view of the petitioning creditor. The Court reasoned that it would become impossible to open secondary insolvency proceedings if the decisive moment was the moment of filing the petition for secondary insolvency proceedings because the administrator in the main proceedings could dismiss all employees or transfer all assets out of the country, thus eliminating the criteria for an “establishment” Unfortunately, in its line of argumentation the court ignored that administrators in the main proceedings can, and not seldom do, decide to continue the economic activity of the debtor’s establishment in another member state “with human means and goods”, for example to finish construction work or other orders and thus to obtain revenue for the benefit of creditors. Therefore, the court’s argument that it would become impossible for local creditors to open secondary insolvency proceedings if the decisive moment for the existence of an “establishment” was not the moment of opening the main proceedings is not really convincing. What is particularly lamentable is that the court – while aiming to uphold the interests of local creditors – seems not to have given sufficient thought to the question whether the effects of the court’s view on the decisive moment for an “establishment” really do serve the interests of local creditors. This must be questioned because at the moment when one of the many local creditors filed for opening secondary proceedings six months had already passed since the opening of the main proceedings, all employees had been dismissed, rental contracts and projects had been terminated, economic activity had ended, and most of the assets had been sold. It is hard to see the economic sense of commencing additional proceedings, causing additional costs and delaying the process, 18 months after opening the main proceedings.

The judgment of the Lithuanian Court of Appeal has opened wide the door for secondary insolvency proceedings in Lithuania, as in many cases – like the one at hand – it will be easy to show that the foreign debtor in insolvency maintained an establishment in Lithuania at the moment the main proceedings opened. It remains to be seen if this retrospective test really will serve the interests of local creditors in cross-border insolvency proceedings or if this precedent judgment will be abused by some local creditors trying to torpedo the main proceedings in order to “negotiate” some special treatment.

Decision of Lithuanian Court of Appeal as of 7 August, 2015, civil case No. 2-1420-381/2015